The U.S. Economy Rises and Falls on GAAP

U.S. generally accepted accounting principles (GAAP) are essential to the efficient functioning of the economy because users of financial reports rely on them when making capital allocation and other important financial decisions.

That’s a paraphrase of comments made by FASB Chairman Russell Golden during his testimony Sept. 22 before the U.S. House of Representatives Committee on Financial Services.

His comments point to the heart of the matter: the economy, in essence, rises and falls on GAAP. 

Neutrally Depict the Economics.

Golden said the objective of financial reporting is to neutrally depict the economics of a transaction and therefore provide financial information about a company that’s useful to existing and potential investors, lenders and other creditors in making resource allocation decisions.

“These decisions typically involve buying, selling or holding equity and debt instruments and providing or settling loans and other forms of credit,” he said.

Not Intended to Drive Behavior.

Accounting standards are not intended to drive behavior in a particular way, Golden also said. Rather, they seek to present financial information so that users can make informed decisions about how to best deploy their capital.

FASB is the standard-setting body authorized by the Securities and Exchange Commission to develop U.S. GAAP.  During his testimony Golden gave a clear comprehensive outline about how FASB develops accounting standards.

Golden explained FASB’s standard setting process, how that interacts with enforcement and auditing bodies, and how the board remains accountable to its stakeholders.

He also touched on several of FASB’s recently completed projects and its ongoing standard setting activities. Furthermore, he discussed how FASB is addressing financial accounting and reporting issues for not-for-profits, private companies and employee benefit plans.

A full copy of the testimony is posed on FASB’s website: